A special purpose vehicle (SPV) is a financial entity created for the purpose of fulfilling a very specific and limited use. It is separated from the sponsoring or parent company for legal and tax reasons, and may be controlled by several companies working together. This type of entity attracted a great deal of attention in the first decade of the 20th century, when SPVs were a common feature of “creative accounting” used by several major corporations to blur their financial positions for fraudulent reasons. Despite this unfortunate association, they are perfectly legal and, in fact, sometimes very useful.

Also known as a special purpose entity (SPE), an SPV is usually created to isolate the parent company from risk. In addition to isolating risks, it is itself isolated from financial risks at the parent company such as bankruptcy, and it is sometimes called a bankruptcy remote entity for this reason. Classically, a company will create an SPV to securitize debt, selling debts to the entity to raise cash quickly so that it can continue lending and other financial operations.

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Another reason to create a special purpose vehicle is to have a company that is legally separate from the parent company to shelter new inventions and other developments. These entities can also be used for risk sharing, in which companies pool risky resources in an SPV and securitize them to raise funds. They can be used for financing as well, isolating the parent company from the risks and creating an entity that can become the face of the project.

The process of creating a special purpose vehicle can be overseen by lawyers and accountants who specialize in this type of activity. They can confirm that the entity is being created legally and that the specifics of the deal are handled in a way that complies with the law. For example, an SPV for securitization cannot be held by the primary owner of the debt, which dictates the way in which it is set up and who controls it.

Thanks to the use of SPVs in accounting fraud, some governments scrutinize these entities closely and have proposed tighter regulation of their activities, including a clearer definition of how and when these entities can be used. This is designed to prevent situations in which an SPV is used to do things like hiding debt from a company's stockholders.

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